The Impact of the Iran Conflict on Global Investment Strategies
The sudden outbreak of war in Iran has led to a significant shift in the investment strategies of major investors around the world. As global markets grapple with uncertainty, the question arises: where is the money flowing?
Lori Heinel, Senior Vice President and Chief Investment Officer (CIO) of SSIM (State Street Investment Management), the asset management arm of State Street, one of the world’s largest stock custody banks, shared insights on the evolving landscape. According to Heinel, while institutional investors have not drastically reduced their equity exposure or increased cash holdings since the conflict began, there is a clear trend toward expanding U.S. equity allocations. Despite market volatility, U.S. stocks remain a core preferred asset.
State Street, along with BNY Mellon, is one of the oldest financial institutions in the U.S., with over 230 years of history. It manages $53.8 trillion in custodial assets (AUC) and $5.7 trillion in assets under management (AUM). As a custodian for global institutional investors, including the National Pension Service, it is often among the first to detect shifts in large capital flows.
Before joining State Street, Heinel worked as an investment officer at Oppenheimer Fund, Citigroup Private Bank, and SEI Investments. In a recent meeting, he expressed cautious optimism about the Korean market, highlighting the sudden changes in capital flows and investment strategies due to unexpected variables.
Prolonged War…“Recession Risks Grow”
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How have market outlooks changed?
“We initially expected a constructive environment globally in 2026, with growth improving and inflation being suppressed and continuing to decline. We believed these conditions would expand widely from developed to emerging economies. However, the conflict has poured cold water on these prospects.” -
Where is money moving now?
“In the early stages of the war, there was a flight to traditional safe assets. The U.S. dollar, gold, and commodity prices, particularly oil, rose. However, as Iran resisted stronger than expected and the conflict prolonged beyond initial forecasts, we entered a new phase. While the war was initially expected to last ‘4–6 weeks,’ forecasts have now shifted to ‘4–6 months.’ This is a very different scenario for investors.” -
There are many forecasts that even if the conflict ends soon, rebuilding destroyed energy facilities will take a long time.
“If the conflict’s impact prolongs, inflation could emerge first. Initially, we thought oil prices would rise slightly for a few weeks, but prolonged conflict has ripple effects across production cycles, leading to entrenched inflationary pressures. This situation will challenge monetary policymakers globally.” -
What about the direction of benchmark interest rates?
“Originally, we expected the Fed to cut rates three times this year. However, if inflationary pressures rise, rate cuts may not occur. This could lead to a slowdown in economic growth, increasing the risk of a recession in the second half of the year, posing a real threat.” -
What impact will this have on the stock market?
“Investors will start preferring less risky assets. While this does not mean a complete exit from stocks, we are observing investors pulling out of sectors that benefited from broad economic recovery. Cyclical sectors like industrials, materials, and utilities are declining, while the technology sector is gaining more attention. Large-cap tech stocks are among the few that can continue to perform even amid slowing economic growth.” -
Bond yields are also reacting sensitively.
“There are concerns that governments will increase fiscal deficits to expand military spending (a factor pushing bond yields higher). However, if a recession or growth slowdown occurs, yields will eventually fall. Initially, fears of rising bond issuance may push yields up, but over time, as growth slows, yields are expected to decline.”
“U.S. Tech Stocks Still Bright”
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Where will global capital flow in the future?
“We expect a return to the structure that worked well in 2024 and 2025. Primarily, high-growth assets like U.S. large-cap stocks will see a ‘flight to quality,’ and the trend will reverse from emerging markets back to the U.S. Demand for gold will continue, making it more likely to reach $6,000 per troy ounce rather than retreating to $4,000. We also anticipate further inflows into the U.S. dollar and U.S. bonds. As economic slowdowns are expected, bond prices will rise, allowing investors to once again benefit from diversification effects that disappeared over the past few years.” -
Is the ‘de-dollarization’ trend, which was a hot topic in last year’s asset markets, over?
“In a stable state where the conflict is resolved, our general view is that the dollar will weaken over the next 5–7 years. However, this does not mean investors will flee U.S. assets. The growth rate of U.S. assets remains higher than any other global asset, so there is still sufficient reason to maintain U.S. positions. Despite concerns about fiscal deficits, demand for U.S. bonds will continue due to the necessity of international trade.” -
Many investors are cautious about tech stocks due to AI bubble concerns.
“First, I do not believe AI is a bubble. We are at the beginning of a very long technological innovation cycle. The massive investments in AI are justified, and companies at the center of this innovation are generating huge profits. Other sectors and industries will adopt AI technology to boost productivity, innovate, and reduce costs.”
ETFs Are Now the ‘Core’…Korean Market? ‘Cautiously Optimistic’
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In the Korean stock market, ETF trading volume accounts for nearly 50% of total transactions.
“ETFs are a preferred investment vehicle for both institutional and individual investors, but they are also driving the market’s retailization. As the market is driven by individuals, volatility has increased significantly. ETFs are no longer the ‘tail wagging the dog’ but have become the ‘dog itself.’ I believe they are an indicator of investor sentiment across various asset classes.” -
As an ETF issuer, what is your outlook for the ETF market?
“Products like SPY (State Street SPDR S&P 500 ETF) have overwhelmingly higher trading volumes than any individual listed stock globally. The ETF market will grow further, especially in equities, while bond ETFs are in early stages and more products will emerge. There is also ample room to convert existing mutual funds into ETFs.” -
How do you view the Korean market?
“I am ‘cautiously optimistic.’ The caveat is because stock prices have risen sharply in a short period. We still maintain an ‘overweight’ position on Korea in our portfolios. I disagree with the notion that foreign investors have all left. There is still significant optimism among foreign institutions. However, if global growth slows due to the Iran conflict or other reasons, it could pour cold water on the market.”
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